This Time Around, American Internet Companies Can Succeed in China

The conventional wisdom in China's Internet industry is that the cultural barriers here are so high that American companies can never succeed. Plenty of case studies seem to prove the point. Ebay crashed and burned, Yahoo passed much of its business to Alibaba and then got the hell out, Google fell out with the government, Facebook will probably never get in, and Groupon took the meaning of "fail fast" to a whole new level.

But things change, and in China the conventional order is being challenged in more ways than one. The advent of the mobile era provides opportunities not only for domestic startups to find or create niches not already occupied by the Big Four – Baidu, Alibaba, Tencent, and Sina – but also for foreign companies to overcome some of the inherent cultural obstacles while outmaneuvering the copycats. Because Apple controls one of the two major dominant platforms, and the ecosystem tied to it, a new generation of hopeful foreigners could actually stand a chance in China.

At least, that's what Robin Chan thinks. He has some credibility. The entrepreneur-turned-investor has been splitting his time between Beijing and Silicon Valley since 2008. He founded the social game publisher XPD Media in China, which in 2010 was acquired by Zynga as part of its first move into Asia. As an angel investor, Chan has taken stakes in Twitter, Foursquare, Square, and China's answer to Apple, Xiaomi. He is also an advisor to Flipboard, which launched in China at the end of last year.

In the past, American companies were too slow to localize their products and put together Chinese management teams. That gave copycats the opportunity to catch up and then out-run the less agile foreigners in the race to serve local needs.

Now, however, we're in a new era in which there's a rapid migration to mobile devices, says Chan, which is resetting the rules for competing in China. "You have two platforms that are being pioneered by American companies: Apple and Google. In iOS, you have a distribution platform that is fundamentally global, stable, simple, and the large majority of developers around the world are building iOS first," he says. "If you build iOS first from the US, you might as well build iOS for the world." When you launch your app, you can enable language capability from the get-go, and that includes Chinese.

Apple allows innovators to compete fairly, Chan says, because with good execution, their products can get featured in the App Store, which helps them build market share and a leadership position. In that sense, Apple acts as kind of a fair-play referee, allowing innovative foreign companies to get a leg up on the copycats, who might not enjoy the same attention in the App Store.

Chan won't go so far as to say that Apple penalizes copycats, but its values are more aligned with risk-takers and pioneers. "Apple by culture and by history would love to support innovators, especially things that are built and optimized for the iOS platform," he says. "That's regardless of where that application development comes from."

That levels the playing field, because it means people have to compete on product rather than on how fast they can steal an idea.

"You're starting to see certain companies have relevant market share and they compete against Chinese application companies," says Chan. In some ways, they have tremendous advantage over the Chinese app companies, because of what Chan calls the "invisible road map".

"When a visionary entrepreneur has an idea, he's already got in his head the next six months what he wants to build – he's just building it. That can't be cloned until it comes out into the market. So a lot of foreign entrepreneurs have advantages in their product."

Beyond Apple, foreign players will still have to compete against local players in the Android app stores and devices. There are dozens of each, and most Android marketplaces will charge developers to feature their apps in the most visible positions. Android in China is more widespread than iOS, so foreign companies will still have a battle on their hands. But, as Chan points out, "at least they have a fighting chance to get a beachhead through Apple."

Chan says US companies that could do well in China include Pinterest, Lookout, Path, and Brewster.

The head of Silicon Valley's first US-China incubator agrees with Chan – to an extent. Eugene Zhang, the president of the recently founded InnoSpring, says he doesn't know if there have been drastic cultural shifts that make it easier for American companies to get into China, but their chances are better than ever. Partnerships can help. “It doesn’t solve the competition problem," says Zhang. "It solves the government-not-shutting-you-down problem.”

In China, competition is fierce, so startups that have a high technology barrier – such as clean tech companies – have a decent shot at becoming dominant. By setting up an incubator with the intention of helping US companies get started in China, Zhang clearly has a pretty big bet on that idea. Unlike Chan, however, he's not enthused about the potential in mobile.

"The mobile space – for pure business models, pure apps – it’s relatively difficult to be in China, because on the local Android market there are so many developments, so much competition." Mobile applications are also sensitive to cultural forces, he says, so local startups are better placed to win. If something has a low barrier to entry – such as Flipboard – a local player is likely to get better traction.

Zhang did single out Evernote as a potential US success story in China, however. The company has the advantage of an advanced cloud infrastructure, and a good local partnership with private equity firm CBC Capital.

On the other hand, one school of thought is emerging that says US companies should go it alone in China. Capital partnership aside, Evernote also fits that description. Word on the street is that it is one of the few foreign companies getting China right. Rather than set up a joint venture – as, say Groupon did with Tencent – Evernote has entered China with a Chinese name (Yinxiang Biji), aseparate team, a localized service, local data centers, local customer support, and partnerships with key local players, such as UC Web, which has the dominant mobile browser in the country.

Richard Robinson, a Beijing-based serial entrepreneur and co-founder of a new social network called Youlu, believes American companies can now make it in China if they forget about joint ventures and stay away from social networking, media, and gaming, all of which are subject to heavy government regulation and potential censorship.

"They should hire exceptionally well and give substantial support from the top as well as decent autonomy to local team," says Robinson. "They should also be willing to do things differently here in China than they have in other markets, such as a name change, or more localization, or China specific modifications."

Robinson points to Evernote and LinkedIn – which several sources have indicated is gearing up for a big push into China – as potential winners here. Or, as he puts it, they are "decently suited to emerge moderately victorious from the Chinese gladiatorial arena".

As they themselves would no doubt readily attest, Groupon and eBay would take "moderately victorious" any day.